Oil price fall a modest drag on Gulf equities

Dubai, May 10, 2012

A slide in global oil prices is weighing on stock markets in the Gulf, helping to push down heavyweight petrochemical shares, but stocks remain unlikely to enter longer-term downtrends, analysts say.

Regional markets were hit hard this week, with Dubai's benchmark index closing Wednesday at a three-month low and Saudi Arabia's bourse recording its largest daily loss in three weeks on the day. The Saudi index has lost 4.2 percent in the last five sessions, though it is still 13 percent higher than its level at the end of last year.

Equally ominous for the markets is a decline in trading turnover, which suggests some investors have lost interest in stocks. Daily stock trading turnover in Saudi Arabia rose early this year to several times last year's levels, but it has since fallen back to only about twice typical turnover in 2011.

One major reason for the decline is the weakness of stock markets globally, which have been dragged down by renewed concern about Europe's shaky economy and the euro zone debt crisis.

Another factor for the oil-dependent Gulf, though, is the drop in oil prices; in the past six weeks. Brent crude has fallen from around $125 a barrel to $112. For many Gulf economies, which derive a third or more of their output from the oil sector, that means slower growth. "The worsening world economic outlook is hurting the demand for petrochemical products and exports," said Saudi-based Khaled Alageel, general director of Nama Oil and Mineral Consultation. "Our correlation is to US and European equities, and in turn oil is correlated to them." At the start of April, Saudi Economy and Planning Minister Mohammed Al-Jasser said his country's gross domestic product was heading for 6 percent growth this year, down only slightly from 6.8 percent in 2011.

The weak oil price helps to explain why the Saudi petrochemical stocks index is down 13 percent from this year's peak in April, underperforming a 9 percent drop by the overall market index.

"This year's average petchem selling prices will be 5 to 8 percent lower than in 2011," said Tariq Alalaiwat, equity research analyst at NCB Capital.

There are reasons to think that Gulf stock markets are not starting an extended slide, however. One is the fact that last year's strong growth has partially eased financial tensions in the region left over from the global credit crisis and Dubai's corporate debt problems of 2008-09. Companies have had time to work on restructuring their debts. Meanwhile, Dubai's long slide in real estate prices may be close to ending; a Reuters poll of analysts published this week suggested that after a collapse of roughly two-thirds since 2008, Dubai home prices would rise 4 percent by year-end.

Secondly, oil prices have only returned to levels which prevailed in the second half of last year, when Gulf economies were growing solidly. In fact, officials in Saudi Arabia and some other Gulf countries appear comfortable with the idea that oil prices might fall further. An oil price of $100 a barrel is fair, Kuwait's oil minister Hani Hussein told the Al-Rai newspaper this week.

Analysts said such comments appeared to stem from a recognition that moderately lower oil prices might actually be healthy for the Gulf. Although they could slow the region's growth rates slightly in the immediate term, they could set the stage for more stable long-term growth by easing pressure on the struggling global economy.

Alageel at Nama Oil said oil price levels had moved closer to levels which would maintain a balance between price and demand. "The drop is not a cause for concern - while oil at high prices is healthy for Saudi, it is unhealthy for global demand. We're actually down to a sane level from $120," said Alalaiwat at NCB Capital. - Reuters